Reserve Bank springs surprise with dovish OCR forecast

The Reserve Bank was widely expected to keep rates at a record low, yet market economists were taken off guard by the central bank’s language. Governor Adrian Orr hinted at a softer outlook for the New Zealand economy, following a sustained period of weak economic growth. The bank continued its neutral stance on whether the OCR would move "up or down", a stance Orr said was supported by "more balanced risks".

Imre Spiezer, head of NZ Strategy at Westpac, said the OCR forecast change to 2020 had sprung a “dovish surprise to markets”. 

Westpac’s Dominick Stephens said the forecast change was “predictable” as he “never thought growth could live up to the hype the Reserve Bank expected”. He added: “We expected a degree of reaction but the question we are asking now is, are they overreacting? We don’t think GDP growth will be as weak as they say in the near term.”

The Reserve Bank said its decision to push back OCR rate forecast had been partly informed by delays in the Kiwibuild scheme. The Reserve Bank said the delays would likely push back GDP growth and inflation. 

Christina Leung, of NZIER, said the “extent of the [OCR] forecast [change] was surprising”. She said: “The market was expecting more of a dovish statement but they have pushed it back more than we expected. What is more interesting is the scenario of softer growth and what would get them cutting rates. There is not a lot in it to push them to cut.”

ASB’s Nick Tuffley said the Reserve Bank’s language was “softer than generally expected”, but the bank still expects rates to rise “late next year”. Tuffley said he expected inflation to pick up more quickly than Reserve Bank forecasts, a factor that could lead to a rate rise before 2020.

The forecast will likely lead to an extended period of low rates for New Zealand borrowers. In a press conference following the OCR announcement, Orr was questioned about keeping  a lid on New Zealand house prices. Orr said high household debt levels and slowing house price growth could see the central bank "revisit" LVR restrictions.